The Missing Piece in 401(k) Retirement Income: Consolidation

As Baby Boomers begin to retire in record numbers, they’re shifting their attention from saving for retirement to the process of decumulation, or converting their 401(k) savings into retirement income.

For many Boomers, their current-employer’s 401(k) plan wants to come to the rescue, offering them a dizzying array of retirement income solutions. Unfortunately, as these solutions begin to encounter reality, Boomers are finding that one simple, yet critical element is missing that prevents them from working as intended – the consolidation of their retirement savings.

Baby Boomers, 401(k) Plans and Retirement IncomeOver the span of their working lives, Boomers have witnessed the birth of 401(k) plans as optional, “supplemental” retirement plans, the rapid spread of 401(k) plans throughout the U.S. retirement system and most recently, their evolution into the primary – often only – retirement savings plan to be offered by employers.

Along the way, 401(k) plans have evolved important features that promoted one of three core goals:

Participation (ex. - auto enrollment)

Saving (ex. - auto escalation)

Diversification (ex. - target-date funds)

With many new 401(k) features, participant outcomes were maximized under a default structure, where features were automatically “turned on” unless the participants acted to opt out.

Now, with the Boomer retirement tidal wave approaching, “decumulation” is making a strong bid to join the list of core goals. As evidence, plan sponsors have started to offer a dizzying array of retirement income features that include both in-plan and out-of-plan offerings, managed drawdowns, guaranteed minimum benefits and so on.

Retirement income strategies can be quite complex, as early-adopting plan sponsors have learned. Optimizing retirement income is a multi-faceted problem, incorporating an array of potential variables, including assets, life expectancy, market risk, inflation, taxes, health care costs, etc.

What’s Missing in the Rush to Replicate Salary in Retirement?In the dash towards decumulation, anything that makes a retirement income strategy simpler and easier to implement is a huge plus.

Fortunately, there is something every plan sponsor considering a retirement income solution can do to greatly simplify this process: facilitating the consolidation of their participants’ retirement savings.

Why? According to EBRI statistics, the typical 60-year old Boomer nearing retirement will have changed jobs almost 10 times. Consequently, it’s not unusual for many Boomers to be managing their current 401(k), plus several “stranded” 401(k) accounts or IRAs, all at the same time.

Aside from the incremental fees and complexity associated with managing multiple retirement savings accounts, a multi-account scenario makes the execution of a retirement income strategy extremely difficult for the participant, and virtually impossible for a plan that houses only a portion of the participant’s retirement savings.

Consolidation solves the dilemma caused by fractured retirement savings, offering participants the opportunity to get their retirement savings in one spot, making the execution of a retirement income strategy far less challenging.

Put simply, consolidation is common sense!

Implementing a Consolidation Program in Your PlanWhile a default approach to consolidation would once again optimize participant outcomes, such a default does not yet exist in the retirement industry, leaving the plan sponsor to implement an “opt in” strategy for consolidation that can still have a meaningful impact on outcomes. Plan sponsors should consider implementing a consolidation program as a prerequisite for offering effective retirement income solutions.

Take the following steps to promote consolidation in your plan:

Ensure that your plan permits rollover contributions, or “roll-ins.” According to the PSCA’s 60th Annual Survey, 96% of 401(k) plan respondents indicated that their plan accepts rollovers from other qualified plans. Check your plan to find out if it does. If it doesn’t, push for the inclusion of this important plan feature.

Actively promotes roll-ins, particularly at initial eligibility. Everyone, not only Boomers nearing retirement, will want to simplify their lives and save money on fees.

Provide unbiased assistance for participant roll-ins. Roll-ins can be daunting transactions, if performed on a do-it-yourself basis, as this DIY roll-in flowchart depicts. An unbiased, external roll-in service will typically operate on a fee-for-service basis, so that all participants – regardless of balance – will be encouraged to take advantage of your plan. Fees can be structured on a “participant-pay” or “plan-pay” basis. Importantly, these fees, if paid for by the plan, can be considered permissible plan expenses, if the roll-in service is available to all participants. Research shows that participants will embrace this benefit. According to Boston Research Technologies 2015 Mobile Workforce study, 93% of participants surveyed indicated roll-in assistance was a “good” or “valuable” benefit.

If you’re serious about structuring your plan to offer a retirement income solution, you’ll also need to offer your plan’s participants end-to-end roll-in assistance, so that consolidation is an easy option, made simple and worry-free.

Individuals should consult their tax advisers or legal counsel for advice and information concerning their particular situation. Retirement Clearinghouse does not give legal, investment, or tax advice. IRA account fees and product information provided by Retirement Clearinghouse, LLC is subject to change without notice at the discretion of the IRA Provider. Securities are offered through RCH Securities, LLC, a wholly owned subsidiary of Retirement Clearinghouse, LLC and a member of FINRA (www.finra.org). RCH Shareholder Services is a wholly owned subsidiary of Retirement Clearinghouse, LLC and a registered transfer agent with the U.S. Securities and Exchange Commission.